All of us schmucks have a dream. Sell the pico top and then live off the yield. Fucking hell, imagine it lads. Guy Young and Mr. Hayes have been hard at work to help materialize this dream. And it is time to introduce Ethena. A protocol bringing decent stablecoin yield back into the fray.

What is Ethena?

Ethena is a new crypto primitive utterly divorced from tardfi rails. The flagship product is $USDe, a synthetic dollar jamming together two of crypto’s most scalable yield opportunities. Staked $ETH and funding rates from centralized exchanges (CEXs). Glue them together, and you have a product that kicks out a decent and, importantly, exogenous yield. Note that the team uses the term synthetic dollar in marketing- due to its higher risk profile than a traditional stablecoin. Namely custody risk and counterparty risk with CEXs.

Say hello delta neutral design

What makes USDe remarkably unique is its construction. While custody risk and counterparty risk may sound scary, Ethena dodges what could be considered an existential/ systemic risk. What do I mean by this? The vast bulk of stablecoins are collateralized by short-duration bonds held in banks. Remember what happened to USDC when Silvergate folded like a used bill in a cheap stripper’s thong. In the event that the United States defaulted on its debt, everyone would be up shits creek without a paddle. But let us not forget.

And guess what. As yields have increased, fiat stablecoins have been BOOMING G. Paolo has been printing- the types of numbers we plebs cannot even understand. Tether’s net profit in Q1 this year was $4.52 billion; part of it was used to scoop up another 8,888 $BTC. Chads. Now, a quick whiparound of the major classes of stablecoin. The king- fiat stablecoins. These are backed by treasuries, bank deposits, and other tardfi junk.

They are incredibly simple on the surface. You have $1 in deposits and you can issue $1 in stablecoin. Tether is the absolute monster in this space. And when we talk about stablecoins it is Tether versus the world. Unless the europoors and MiCA regulations have something to say. But more on that in the bear case.

Fiat stablecoins are a fucking cash cow. The things print like crazy. All revenue is internalized, and in a high interest rate environment, thick paychecks from Uncle Sam come rolling in.

Worth noting Circle’s goody two shoes approach does seem to be yielding fruit. They got the green light from Europe and will become a more dominant trading pair for European clientele. Additionally, partnering with Stripe, who notched more than a trillion in volume in 2023.

We have RWA-linked stablecoins, which have grown in popularity and are a product of the high interest rate environment. Think Ondo’s $USDY. It passes the yield onto the holder. And then we have the Collateralized Debt Position (CDP) flavor for example, MakerDAO’s $DAI product. Back in the day, this was a legitimately crypto-native project collateralized only $ETH.

But now $DAI is backed massively by RWAs and is no longer a crypto native asset. There was a lot of kickback about this from the community (rightfully so, in my humble opinion), but money talks, and 5% from Uncle Sam was just too good to turn down. So we have fiat stablecoins (massively scalable but fuck holders by withholding t-bill stimmies), RWA stablecoins (high-interest rate phenomenon), and CDP stablecoins (inherently unscalable due to requiring more collateral than mintable + primarily used for leveraging up on deposited collateral).

Ethena delivers the delta-neutral design. Tokenize the spot collateral and corresponding short position, and now we have a fully crypto-native stable asset fed by the greatest yield lakes in the space. However, while Ethena may be relying on crypto-native yield sources and operating outside of tardfi that does not mean it is decentralized. In fact, it is one of Ethena's greatest bull cases. Guy Young (founder) understands decentralization is a meme and has chosen to avoid it. The build design displaying Young’s tardfi roots perfectly.

Ethena leverages custodians to custody assets and then mirrors them on centralized exchanges- this is cooler thank you think. A principal risk to Ethena is counterparty risk, but in this case, even if the exchange goes pop, Ethena can give back to users. Also it makes way more sense to run a cash & carry on CEXs where funding rates are more bountiful than DEXs.

Genuinely a good emergent trend to tease apart custody, execution, and settlement instead of having them scrambled up like eggs in a mysterious box. Non-ironically, you can thank SBF for this, with the FTX blow-up making large funds uncomfortable leaving assets on platforms. In short, Ethena has forgone decentralization to maximize scalability and, arguably, security- I would much rather have funds with a custodian than in a smart contract.

How Ethena works

Right boys there are a couple of moving parts, so let's knock them on the head quick time.

Components

$USDe is the synthetic dollar.

$sUSDe is staked $USDe that earns yield.

$ENA is the governance token (fucking googly-eyed useless piece of shit.)

‍Key Concepts

Funding Rate: The great balancer between perps and spot is the funding rate. When perp prices get ahead of the spot price, the funding rate is positive (everyone and their aunts are long and willing to pay for access to leverage). In this event, longs pay shorts. If perps trade below spot, shorts pay longs. This is the mechanism calibrating perp prices with spot prices and ensuring they converge.

In simple speak, if the perp price is way out of whack with the spot price (excessive speculation), it will be incredibly expensive to keep the position open. The funding rate prevents markets getting wacky by griefing traders financially.

‍Delta-Neutral: Delta-neutral is some tardfi shit bros. All it means is that you are insulated from directional movement. If the price goes up or goes down it does not matter because you are hedged in both directions. Typically, you have two positions that counteract each other, aka long spot short perps.

Cash & Carry trade  

If you understand what a cash & carry trade is, you understand Ethena. If you don’t, don’t worry Pango is here. A cash & carry trade is a bread-and-butter arbitrage play. One exploits the mispricing between an asset and its derivatives market and profits when the market corrects this mispricing.

More traditionally done with commodities. You buy spot (physical asset), sell a futures contract, and then settle the trade when the contract expires. You are going long on the asset itself in spot markets and selling the associated derivative.

Silver trades on the spot market for $31 an ounce, and a futures contract expiring in a month is priced at $34 per ounce. You buy Silver in the spot market and sell a futures contract at $34. Whatever it costs you to store your silver is the carry cost. At contract expiration, you go home with your profit: future contract minus spot price and carry costs. Aka, $3 per ounce.

Ethena takes this strategy and applies it to crypto. Hayes is the mastermind proposing the idea in his piece Dust on Crust. You hold native crypto collateral and short on the futures market to offset arriving at the zen state of delta-neutral. $USDe is the tokenized output of this process. Stake your $USDe for $sUSDe and you get your yield from funding + staking.

Bullish on crypto-native primitives

Ethena absolutely blitzed it to a $3 billion total supply. Take this with a pinch of salt, given how much more capital operates in the space now. Cracking $3 billion today is very different than cracking $3 billion a few years ago.

It is the first product to amalgamate crypto’s biggest yield sources. I know it is a bull market, and we are all in number going up mode, but having native primitives is net bullish. First, it offsets systemic risk that could occur in TradFi (shout out all the late-stage empire larps) and increases crypto's base sovereignty. Stablecoins are crypto’s most successful product to date- a digital dollar is inherently better than a fiat dollar when we talk about composability. They are the bridge between to and from fiat, allow you to wait out volatility, and are an absolute bedrock for providing liquidity for trading activities. Speaking as a wiggy anti-establishment bloke, I am all for greater decoupling, and $USDe is precisely that.

The best net component of Ethena? It imports liquidity from centralized service providers into DeFi. All those funding rate fees are getting slurped and ported on-chain.

How does Ethena stack up against its stablecoin brethren?

Anybody can wax on about decentralization, transparent reserves, and regulatory compliance (gay). But what it comes down to is liquidity and integration.

‍Can you service redemptions, and how many CEXs/ DEXs use the stablecoin as a key asset pairing?

Tether is the proof of this statement. It all comes down to the two overlords of liquidity and integration - this is how stablecoins build a moat. $USDT remains the undisputed king of stablecoins. The funniest thing is that objectively, Tether is the worst product. It shares no revenue, and its audits are sketchy at best. But Tether is so deeply ingrained in the space that it will likely never be toppled.

Paolo understands the game. He knows that sometimes you’ve got to do sketchy shit to keep the machine humming. And that, my friends, is the entire essence of this game. All the shadow money stays in USDT, along with Asian capital and offshore exchanges. It is the most dominant form of collateral for perpetual futures trading, and let us not forget that Tether has redeemed billions in the face of egregious market conditions. Totally anecdotal, but from experience, whenever you use crypto in the developing economy, people want USDT, and they want it on Tron (a chain that Circle no longer supports.)

It is almost painful that due to Circle’s regulatory-friendly approach, they kind of killed themselves. Large holders are all KYCed through the ass, so they can jump between USDC and T-bills quickly. Tether also has extra buffers, including its 0.1% redemption fee, which Circle only implements when daily volume eclipses $15 million.  However, Circle’s approach could yet bear fruit in the long term, especially as FinTechs start to integrate USDC (Stripe), and it is likely to be the net winner of the europoor MiCA bill.

$USDe Integrations

Who is using USDe? There is a long list of DeFi integrations, with new ones popping up all the time, such as this recent proposal from Radiant to onboard USDe. USDe and sUSDe can be collateralized on Aave, it is included in MakerDAO’s endgame roadmap, it features on Llamalend, and even Frax is keen. In short, USDe has DeFi on smash.

But the integrations we care about are the big dogs. On June 5th, USDe was integrated into Bybit for use in spot, perps, and earn sections. Then on June 20th USDe was integrated on Bitget as margin collateral- also available in the Earn section. Lads, this is not small potatoes. Between the pair, these CEXs boast over 45 million users. A roaring success on the integration front.

USDe is making all the right moves in all the right places.

Wrapping up the product

If you have made a couple of bucks and want to earn a yield on stables, Ethena is genuinely a sick product. The interest rate is exogenous, which turns the supply into a liability. Yields too high? Expand the supply. Yields compressed? Shrink the supply and, therefore, liability. Ethena is an organic living organism reacting in real-time to market forces. It is a beautifully simplified avenue for regular folks to enjoy a cash & carry trade. Yielding 7.4% at the time of writing and entering a halcyon period.

Ethena additionally has an insurance fund to counteract negative funding periods- literally just a bag of dollar bills to spend through any problems. I am a big supporter of insurance funds kept in stable versus using the governance token- when you need it you end up selling into thin markets, tanking the price, and increasing the likelihood of a death spiral (if not directly, then indirectly due to USDe holders being spooked by a crashing ENA). Ethena ticks all the boxes, and the combination of Hayes, full degenerate, and Young, tardfi warrior, shines through with a lovely mix of gas and brakes. Overall a very solid product.

Addressing the misguided Luna comparison

I don’t want to hear any comparisons to Terra. For any schizoid PTSD-ridden smooth brains, let’s address this now. Terra’s algorithmic stablecoin $UST was premised on a constantly rising price of $LUNA. It was an unstable equilibrium, meaning it failed dramatically. (Pro tip: shit that is unstable usually rips hardest if you can get out before the death spiral. Reflexivity works both ways, baby.)

Anchor’s savings rate was fixed and hard-wedged into the dynamic. Ethena is a different beast and reacts to market forces. An overreliance on the value of $LUNA and an artificial interest rate on Anchor was simply not sustainable. But nobody wanted to hear that in 2021, and only the bear market showed us who was swimming naked. That shit fucking rekt the market and burned a lot of intelligent people.

Ze $ENA token

Ethena ripped an airdrop in April, distributing 5% of the total token supply with an interest 50% linear pro-rata vesting for the 2,000 largest wallets. The second airdrop, ‘Sats Campaign,’ is currently ongoing. Happy to be wrong, but this shit is way too diluted now to be worth doing, considering the opportunity cost of holding stables.

Why bid $ENA? Mate. Honestly, I couldn’t give you a single reason. I wouldn’t bid that shit with my worst enemy’s portfolio. If you lock it, you get 30X sats and a boost for the airdrop. Yeah fuck off lad.

Unlocks begin in earnest next April, and current stats for $ENA are:

FDV: $6.1 billion

Market Cap: $701 million

Circulating Supply: 1.7 billion

Total Supply: 15 billion

It is a death by a thousand paper cuts job. Remember, your counterparty is Hayes. He truly is one of us. He just happens to be more skilled and better capitalized. Stepping into the ring one-on-one with the Hayster is asking to get yoinked.

This man will fuck you if you give him the chance. No way I am lining his pockets by bidding $ENA. A deeper dive also reveals a couple of nasty facts- a massive shout-out to dyorcrypto for the Dune data. VCs eating well with this one.

Project: Ethena (ENA)

VC Dominance: High

Dump Pressure: High

Next Investor Unlock Date: 2025-04-02

Supply Unlock: 937.5M

Lead: Dragonfly

Vesting Type: 1 Year cliff/ Linear 36 months

Investor Supply% in Cap table: 25.0%

Raised Amount: $20.5m

Avg Investor Round FDV: $82 million

Unrealized Profit(in Multiples): 79.96

Special shoutout to Dragonfly who have been mopping up this cycle. Genuinely a pretty good VC fund. But one question. Have you ever seen Megamind and Haseeb in the same room together? Yeah. Thought not. Checkmate. The best thing about crypto is how retarded and uninformed your counterparty can be. Do not step into the ring with the big dogs. OTC markets look brutal as well.

The market is in the process of rerating these VC coins, and with early investors already sitting on 80X I imagine they are happy sellers at a way lower price point. Don’t get rekt lads. The same rules apply. Stick to bidding animal tickers, or if you want to invest in tech, DeFi protocols with revenue that have parity between circulating and total. A good case can be made for the latter with the $ETH ETF inbound. Personal opinion, but governance meme tokens are cooked.

In summary, Ethena is a cracked protocol, but the $ENA token is fully cucked.

Ze bull

The peak is certainly in for the hiking cycle, and Powell is positioning himself to start cuts. Any stablecoin paying out a yield from T-bills will see its yields compress. At the same time, capital will flood into risk assets- aka more leverage and more balls-to-the-wall longing. Ethena’s yield should theoretically expand while the yield of its competitors shrinks in the coming months. Surely, this is a perfect setup. Not to mention that humans love speculation and derivatives markets always grow far larger than their underlying markets. Ethena in a bull market where everyone is paying through the eyeballs for leverage is a dream.

But the real victory is being integrated as a core pairing on CEXs- an area which in fairness, Ethena has proven competent. How does Ethena win? It pays out a yield that beats the market average and becomes more deeply ingrained as collateral on CEXs.

Ze bear

Ethena functions best in a bull market- cannot deny that. The Bitcoin ETF has allowed institutions to carry out this cash and carry trade at scale. Whereas I think the idea that the majority of ETF inflows for $BTC have been for the basis trade is retarded. Certainly, a chunk of it is being used to slurp up funding rates with delta-neutral positioning.

This trade is also not overly complicated, and DeFiLlama has a dashboard where anybody can spin up their own version. You are paying Ethena to offload all responsibility. But everybody wants to know what happens when funding goes negative. Will Ethena blow up?

Even though this is the bear case, one cannot distort the data. Observe the average funding rate above. Funding going negative is rare, and it does not stay negative for long. This will also be offset with staking yield. Add in the supply being the liability, and in dire straights, USDe’s supply can be shrunk. I would bet that Ethena can weather a bear, the yield will be crap/non-existent, but it should survive.  

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Ethena’s central problem is Tether and its absolute dominance. Just look at the difference in volume- they are playing different games. USDT’s lindy effect remains undefeated. Other significant tailwinds will come from MiCA. The europoors are introducing strict guiding principles for stablecoins and it remains unclear if USDe will cut the mustard.

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Total USDe supply peaked at 3.6 billion, and this seems to be a reflection of current market sentiment and therefore obtainable yield. Fear is in the air, and nobody wants to go balls to the wall with German & Mt. Gox overhang. The product is great and it is hard to mount a bear case against it- the only things that come to mind are what happens with an LST depeg event, and there has been no baptism of fire with mass withdrawals yet.

Second order consequences & Pango’s play

The biggest question is, if Ethena continues to grow, how much influence will it exert on markets? Large short perp positions artificially suppress the funding rate, which needs to get wiped every once in a while to flush out froth. Could Ethena lead leveraged traders higher and higher up the cliff? Are Ethena’s short positions capping the upward momentum of $BTC and $ETH?

This all loops back to Ethena being a bull market focused protocol. When there is a ton of open interest, Ethena’s effect is naturally more subdued. I would go as far to argue that the largest impediment to Ethena’s growth currently is the current level of open interest.

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I like the product but would not use it in the current market conditions. Holding USDe means you are subsidizing sUSDe enjoyers. I don’t want to stake my stablecoins for seven days for 7% broski. I want them on hand. Not even going to get into $ENA. I would not touch it with a bargepole- pure thoroughbred VC aids. I will stick to longing funny animal tickers thank you very much.